The Puerto Rico Financial Oversight and Management Board (FOMB) rejected USD 6bn in general obligation (GO) debt, arguing in a new objection filed on Monday (14 January) that the commonwealth breached its debt limit as early as March 2012.

Puerto Rico has failed to count Public Building Authority (PBA) debt — which, the FOMB says, is GO debt by another name — under its 15% constitutional debt limit. Debtwire Municipalsfirst reported that Puerto Rico may have breached its debt limit because of PBA obligations in November 2015, which the GDB said at the time was “factually inaccurate.”

But now the FOMB, through its Special Claims Committee, and the Official Committee of Unsecured Creditors are making that same argument in an attempt to invalidate the USD 6bn in general obligation debt issued since 2012. Because of the breach, bondholders shouldn’t be paid, they say.

“In economic substance… PBA bonds are just as much direct obligations of the commonwealth as any GO bond issued by the commonwealth itself,” the FOMB argued in its objection, noting that the PBA board is effectively controlled by the governor and rents are paid at whatever amount is sufficient to cover the debt service. “As a consequence, the invalid GO bonds are null and void, and the bondholders have no remedy against the commonwealth on account of such bonds.”

The FOMB argues that the PBA structure is not unique, but that these authorities have all had one purpose: “to circumvention of constitutional debt limits.”

“Courts throughout the country have seen such public building authority structures for what they really are — transparent shams designed to circumvent constitutional debt limits,” the FOMB argued. “In the words of one such court, public building authority structures are ‘a scheme which would fool only a lawyer.’”

Puerto Rico’s is a more transparent attempt at skirting the debt limit than others, since rents are set by amounts owed on bonds, rather than the more conventional market rate, the FOMB said.

This wouldn’t be the first time a court found that a PBA couldn’t be used to skirt a debt limit, the objection said. The West Virginia Supreme Court ruled in 1993 that State School Building Authority debts were subject to constitutional debt restrictions, even after the state had expressly said they were not. Likewise, Oregon’s Supreme Court ruled in 1975 that Oregon Building Authority bonds should be subject to constitutional debt restrictions, the objection said.

A similar issue arose in Detroit’s bankruptcy. Detroit did not have a PBA, but the city tried to get certificates of participation declared void, arguing that they were created to avoid the city’s debt limit. The city and bondholders came to an agreement on the debt paying holders 13 cents on the dollar and the judge overseeing the Chapter 9 never ruled on the issue, though he said that the city “would have had a reasonable likelihood of success on the merits.”

The FOMB also argues that to the extent bond issuances include the unamortized original issue discount, which should also have been counted against the debt limit, but was not, they should be disallowed. This would likely affect more than USD 230m in claims, the FOMB said.

The objection was filed in Puerto Rico’s Title III case, number 3:17-bk-03283 in the US District Court for the District of Puerto Rico. Judge Laura Taylor Swain is presiding.